Reference no: EM133133223
Question - The Potters are deliberating whether to purchase a house or continue to rent for the next 10 years. They are assured by both of their employers that no transfer to a new location will occur for at least this number of years. The school their children attend is very good, and they like the neighborhood where they live now. They have a total of $40,000 available now and estimate they can afford up to $2,850 per month for the total house payment. Rent-don't buy plan: If the Potters do not buy a house, they will continue to rent the current house for $2,300 per month. They will then place $40,000 into a savings account that pays an effective rate of 6% per year. Additionally, they will add to this investment $550 at the end of every month, the difference between what they can afford and what they indeed pay. Buy a house plan: The Potters are considering a house at a price of $330,000. Taxes and insurance are $500 per month. Upfront fees are $3,000 (survey fee, lawyer fee, etc.) Any money not spent on the down payment, upfront fees or monthly payment will be invested at a rate of 6% per year. The Potters anticipate selling the house after 10 years and plan for a 10% increase in price, that is $363,000 (after selling expenses are paid). The current 15-year fixed rate is 5% (per year), with a down-payment of 10%.
1. Evaluate both plans.
2. Reconsider the problem assuming the selling price after 10 years is only70% of the purchase price, that is $231,000.
3. For what house market price after 10 years the Potters will be indifferent between two plans?
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